CA scandal raises tough questions

FOLLOWING a wave of indictments this month that netted guilty pleas to securities fraud and other charges from several former finance executives at Computer Associates International (CA), speculation is turning to the fate of the company's chief executive officer (CEO).

CA has already admitted to improper accounting practices in its 2000 fiscal year that were under investigation by the U.S. Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ). The company has since revamped its accounting methods, replaced most of its board and pushed out a number of executives tainted by fraud. But one executive from that era, Sanjay Kumar, now serves as the company's CEO. And questions linger about the then-president and chief operating officer's involvement in CA's accounting manipulations.

The DOJ complaint against Ira Zar, CA's chief financial officer (CFO) until last October, charges that he regularly met with two other unnamed "high-level" executives who allegedly knew and approved of the financial sleight of hand. Zar at the time reported directly to Kumar, who in turn answered to then-Chairman and CEO Charles Wang, a company co-founder who has since retired.

The DOJ is continuing its investigation in conjunction with the SEC, and speculation in the IT and financial sectors persists that Wang and Kumar may be targets of future actions.

Some financial analysts are already calling for Kumar's resignation, arguing that as the company's operational head, he either knew or should have known what was going on. Mike Trigg, an analyst at Morningstar Inc. in Chicago, issued a report blasting CA for "a management team that we don't trust," and New York-based Credit Suisse First Boston LLC wrote of "increasing fear" that Kumar is one of the DOJ's implicated but unnamed executives. Credit Suisse called Kumar's forced departure "a scenario that is being widely reported by Wall Street."

CA on April 8 released a statement acknowledging that the company and its officers could face civil and criminal proceedings, but it declined further comment.

Complicating the issue of Kumar's future is the general consensus among IT industry observers that he has done a good job as CA's leader. When Kumar ascended in August 2000, he inherited a company that investors didn't trust and that customers castigated for hardball sales tactics. In response, Kumar overhauled CA's accounting and corporate governance, reformed its sales and customer service organizations and made customer satisfaction a top priority.

The changes have worked, according to Jeffrey St. Germain, a project manager for the Massachusetts Department of Education's Virtual Education Space project, which runs on CA's portal software. "At least on our side, things have gotten better," he said. "Perhaps because of what's been going on, they've been more attentive to us."

Javed Matin, CEO of Myriad Solutions Inc. in Silver Spring, Md., said his consultancy, which is based around CA products, hasn't lost any deals because of the accounting scandal. "I don't think it's affected us or our clients in any way, shape or form," he said. "It's been going on for so long, and Computer Associates isn't the only company that's had this sort of problem."

If Kumar is indicted, some disruption is possible. "That would get a lot of visibility. People would take notice," Matin said. "We'll have to wait and see. I'm hoping it wouldn't have any adverse effects on our business or CA's business."

Michael Dortch, an analyst at the Robert Frances Group Inc. in Westport, Conn., said CA will weather any shake-up. "I'm not worried about them, and none of our customers seem to be very worried, either," he said. "What most IT executives care about are the next deliverables. If something were to happen to impede Sanjay's ability to lead, they'd find the engine would keep going. CA is bigger than any one individual in the management team."

A resolution to questions about Kumar's future may come this week: The New York Times reported Monday that CA's board will meet shortly, possibly Tuesday, to consider Kumar's role. As many as a dozen employees may be forced out as the board tries to resolve issues stemming from the accounting violations, the newspaper reported.

Kumar, 41, was CA's heir apparent for years before he stepped into the CEO position. This time, the company doesn't have a clear number-two.

Earlier this month it hired former Hewlett-Packard Co. global operations head Jeff Clarke as its CFO. Analysts say he's well-regarded and, as a skilled executive from outside CA's inner circle, a potential CEO candidate if Kumar is forced out.

"I think Jeff would be great at almost any position he'd be willing to take on," Dortch said.

Clarke is a "very talented and seasoned executive," according to Susquehanna Financial Group LLP analyst Gregg Moskowitz , in New York. But he's also an executive who has enough to sort out as CFO without taking on even greater responsibilities, he said.

"CA has a pretty deep bench -- there are a lot of experienced executives -- but, to my mind, not one that stands out as a natural replacement (for Kumar)," Moskowitz said. "It's not out of the question for CA to hire another outsider."

Still, Moskowitz said he's not terribly worried about the effects of a leadership change on CA.

"There's always the risk of temporary disruption, but looking back, CA has done a very good job of focusing on the business and the customers," he said. "Given the severity of the charges, this certainly had the opportunity to derail their strategy, but they've done a very good job executing and running the business."

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